Britaly? Identifying euro area historical analogues to the UK’s 2022 bond market shock

Abstract

Comparing the UK’s 2022 sovereign debt crisis with earlier European examples is crucial for a holistic understanding of how such crises emerge and evolve to better comprehend the warning signs of sovereign distress and the importance of coherent and credible economic governance. Both crises were marked by sudden and severe shifts in investor confidence. The UK government’s “mini budget” announcement on September 23, 2022, sent yields on UK gilts soaring at a daily rate not seen since the 1990s. Similarly, official disclosure by Papandreou’s government regarding the actual state of Greece’s public finances on October 20, 2009, caused daily sovereign debt yields in some euro area countries to rise to levels not seen since joining the euro. The primary objective of this paper is to conduct a comparative econometric analysis of the euro area sovereign bond market, with the goal of identifying past episodes similar to the turmoil experienced in the UK government bond market during September–October 2022. This comparative perspective aims to provide valuable insights for future crisis prevention in an increasingly interconnected global financial system. Specifically, we use daily data on 10-year government bond yields from January 3, 2000, to June 30, 2023, and apply both univariate and multivariate nearest neighbours’ techniques. (.../...)